PEER COMPANIES

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PEER COMPANIES

We do not expect the current consumption slowdown phase in the economy to persist forever. So this is the time to pick stocks in this space for the next three to five years, says Gautam Duggad, Head of Research, Institutional Equities, Motilal Oswal Securities. Excerpts from an interview with ETNOW.

Currently, markets are most concerned with the outlook on earnings growth. How soon do you see that improving? Is it a while away?From an earnings point of view, we are in for a long grind ahead, given the weak underlying economic momentum and various sectors which are facing stress right now. In any case, for FY20, the earnings recovery or rather the projected earnings recovery was built on the thesis of banking earnings recovering. Even after the first quarter of FY20, where we have cut our Nifty EPS estimate by 4% and have around 13% profit growth estimate for FY20, the fact remains that if we take out the corporate banks, the Nifty earnings are expected to grow just 3%.

So a lot rests on what happens to the banks and what happens to the asset quality if there is a delay in the resolution of NCLT cases. With the guidance of the various banks from the first quarter earnings season as well as the ones who attended our 15th Annual Global Conference a fortnight back, more cases of stress are emerging and that is clouding the outlook for banks earnings for this year. So to that extent, the earnings recovery or rather the risk to the earnings downgrade have become elevated.

Secondly, consumption slowdown is here which is the big takeaway from the first quarter GDP print. Along with auto, more sectors are facing problems and that is getting reflected in the FY20 earnings. We can see another 3-4% downgrades from here. We might end up FY20 with 7% earnings growth like in FY19 and FY18. We had hoped for 15% earnings growth for FY20 but those hopes are getting bashed in the first half itself.

This year IT space was dealt a blow with a tax on share buyback, that was announced in the budget. What are you expecting from IT and which stocks do you like here?We are positive on IT for sometime now. It remains the most sensible defensive in India right now. Consumer is a defensive but very exorbitantly priced and pharma has ceased to be a defensive long back, even though earnings as well as valuations have corrected.

In that context, IT remains one of the best defensives in India. Earnings growth is reasonable at 8%-10%, very high quality balance sheets and managements plus 80-100% payouts . From an investor’s perspective, it should be immaterial whether you are getting the cash back in the form of dividends or buybacks. Obviously, some taxation impact will be there but even then the payout ratios are very high.

Therefore we like tier one IT right now. Even in the last three-four quarters, the growth differential between the tier one and tier two has extinguished completely and that is why you are seeing tier two stocks are now trading at a discount.

One or two years back, tier two stocks were trading at a premium. The commentaries from the first quarter has been pretty good; deal sizes, deal wins are pretty solid. Tech Mahindra already has about a billion-dollar-deal from AT&T. Clearly, IT stands out and at the margin in the last 20-30 days you have seen currency depreciation also coming to its help.

We like Infosys, Tech Mahindra and HCL Tech and one should have a positive view on IT at this stage given the way the currency has behaved in the last 20-30 days. Nifty IT should do well relatively in this kind of an environment.

Among individual sectors, consumption and utilities are looking attractive. Where do you see opportunity?In case of utilities, the biggest thing in their favour right now is the interest rate. Interest rates are coming down and the outlook for interest rates remains very soft. We should not be surprised if there is another 40-50 bps rate cut by RBI. Valuations are at its lowest in a decade at sub one time price to book to 1.2 times price to book even for largecap companies. Dividend yields are very attractive at 4-5%. We are more positive on utilities than we were a year or six months back. We like NTPC and Coal India in this space.

There is a distinct slowdown in consumption which is manifested in the first quarter numbers. The slowdown is more apparent in the discretionary side than on the staple side because most of the staple companies are yet to report volume decline.

Now consumption still remains very expensive despite the time correction that we have seen in many stocks over the last one year. But this is a very long-term story and we do not expect the current consumption slowdown phase in the economy to persist forever. So this is the time to pick stocks in this space for the next three to five years. From that view point, we have been very positive on Titan, Hindustan Lever, Pidilite, Britannia as well as Marico. This is a very good opportunity for people to accumulate these stocks knowing fully well that they may not do much over the next couple of quarters, because of the way the slowdown has played out so far.

What makes you optimistic on Bharti Airtel? We have a very simple view on Bharti Airtel. We think the ARPUs have bottomed out and can be expected to improve gradually from here. Secondly, from a balance sheet perspective, they have raised some capital and are in the process of deleveraging plus the announcements on Jio yesterday have not been so disruptive.

There was the fear a couple of weeks back but given that the lowest ARPU is around Rs 699, it does not seem as disruptive. At the same time, their main competitor continues to be in trouble as far as the balance sheet is concerned. Their debt is quite high and all of these factors have combined with the fact that valuations have also come off and the stock has been absolutely flattish for the last four or five years.

We believe that it offers a reasonable margin of safety and if there is a decent pick up that we can see in ARPU over the next couple of quarters, then it also offers a reasonable upside as well.